There’s a short answer to the question “is property or the stock market a better investment for my retirement?” – it depends on you, your circumstances and your objectives for the future. There are a wide range of factors to consider.
Our purpose is to help people make the wealth they’ve created work for them, so that they can enjoy the life they want to. Whether this is achieved through investing in the stock market, property, or a combination of the two, is something we’re neutral on.
But we often meet people who have misconceptions about the stock market and/or property. Below we dispel some of the myths and bring more clarity to this important topic.
Before we get into too much detail, it’s important to outline the scope of this article. The returns you can make from property investment depend on many different factors. This includes the geographic area in which you buy, whether you take on a mortgage or only use existing capital, or buy and hold property through a company. This makes it impossible to arrive at any reliable assumptions about the returns a property can generate.
Both the global stock market and UK residential property have produced fantastic long-term returns that have exceeded inflation, so read on to consider some other factors that may influence your investment decisions.
Does being a landlord fit with the lifestyle you want for your retirement?
The starting point should be what you want for your future. Do your plans for retirement include trips to far-flung places, or winters abroad to enjoy some sun? If so, how would you feel about getting a call from your tenant about the boiler breaking down, when you’re lying in a hammock enjoying the view?
It comes down to the value you put on your time and that having peace of mind will bring you.
You can outsource ongoing property management to an agent, costing you between 10% and 15% of your rental income1, but you would still need to be prepared to cover any unexpected bills.
You also need to be clear on your responsibilities as a landlord and the ongoing costs associated with that.
How important is having dependable but flexible income?
To what extent will you depend on the income this investment will generate in retirement? If you have a gap between a tenant leaving and the next moving in (or perhaps for a longer period if you had a difficult tenant), will that impact your lifestyle or cause you to feel anxious about your income?
Many of our clients spend far more in the early stages of their retirement. This means they need to have flexibility over the income they take. With a property, you hope to have an income that increases broadly in line with inflation. This means you’re effectively receiving the same in your 80s as in your 60s.
A well-diversified portfolio of global equities balanced with an appropriate amount of low-risk assets, has historically produced strong long-term returns. With careful planning, you can access the initial investment and draw a consistent income from your portfolio to meet your expenditure. However, it’s important to seek professional advice to increase your chances of success.
Is being able to spend and enjoy your capital important to you?
You may also want access to the capital you initially invested for special projects, big trips, new cars and so on. Unfortunately, if it’s tied up in a property it can be very difficult to access.
What’s your plan for any remaining wealth when you’re no longer around? Do you intend to pass it on to your family or spend as much of it as you can? Or would you prefer to be able to pass on your wealth during your lifetime and see the benefit this can bring to your family in their 40s and 50s when they’re likely to be under most financial pressure?
Gifting during your lifetime can also be a great strategy for reducing the Inheritance Tax liability your beneficiaries would otherwise incur on your death.
Investing in property means the risk of your investment is concentrated
Diversification of your investments is important as it spreads the risk you’re taking.
For example, if you depend on the income of a single investment property, and the tenant stops paying their rent, then your income will stop. However, if you have 10 investment properties and one tenant stops paying, the impact on you will be much less.
But even with 10 properties, your wealth is all in one asset class – property. By investing in a portfolio of global equities, you can invest in thousands of the biggest companies in the world, spreading your risk across them.
Diversification can remove a lot of the concern about whether the investment decisions you’ve made were the right ones. None of us know what’s around the corner, as can be seen by the number of investment properties that have been affected by the current cladding situation.
Investing in property is likely to cost you considerably more in tax
The tax changes the government have brought in over the last few years have had a big impact on owners of investment properties.
There’s now an additional 3% Stamp Duty on second-property purchases. This is in addition to legal costs and surveyor fees, which alone can amount to £2,000 or more. This significant capital outlay is before any other money you spend to bring the property up to the standards you want.
The rental income you receive after costs have been deducted is subject to Income Tax at 20%, 40% or 45% depending on your rate of tax.
When you sell the property, Capital Gains Tax (CGT) is due on any increase in its value that takes you above your annual CGT allowance (£12,300 per person in the 2022/23 tax year).
For property, CGT is paid at a higher rate of 18% for basic-rate taxpayers and 28% for higher- and additional-rate taxpayers. As a property has to be sold in its entirety, it does mean a big gain in property value could easily push you into paying higher-rate CGT.
Of course, the same principles apply when it comes to investing in the stock market. Firstly, while there are upfront costs to investing, these should be significantly lower than the cost of purchasing an investment property, especially if it’s simply a case of investing cash.
Although Income Tax is typically due on any interest or dividends generated by a portfolio, some of this can be covered by your Personal Savings and Dividend Allowances of £1,000 and £2,000 per person respectively.
From 2022/23, any dividends earned above this level incur tax at 8.75%, 33.75% or 39.35% depending on your tax band.
A portfolio of stocks and shares can be made increasingly tax-efficient by using ISA allowances each year. Any element of your portfolio that’s not in ISAs is likely to be subject to CGT but, with sound advice, gains can be realised on a regular basis to use available allowances. This means they don’t accumulate year-on-year, leaving an unavoidable CGT bill.
Property often appeals to people because it’s something they can see. Having made your purchase you can lock the front door and walk away with the keys knowing there is a physical asset you can look at when you wish to. But, when this is considered in line with the factors outlined above, plus the hassle factor, many people find property investments don’t meet their objectives for retirement.
If you would like to understand more about smart investment solutions for your retirement, contact us at your@lifemattersfp.flywheelstaging.com or call 01202 025481.
Please note, the value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
The content of this article is based on current tax rules which are subject to change. You should carefully consider your own financial circumstances to determine what’s appropriate for you.
Sources: 1 https://www.landlordvision.co.uk/blog/letting-agent-fee-guide/